Wednesday, February 7, 2007/
Why everyone is becoming a property developer.
Be your own developer
Many property developers complain that they simply can’t make the numbers work in the present environment: that margins are too thin and land is too expensive.
Consequently we are witnessing a shift in market dynamics as builders become developers, and developers re-create themselves as property trusts and hold their assets rather than sell them. These changes are significant and will characterise the property development and investment markets for many years to come.
To use an example, until a few years ago, a typical developer would buy a site for, say, $1 million, spend another $1 million developing it then sell to an investor for $2.5 million. After deducting interest and fees of about $100,000, this would leave $400,000 profit — equivalent to a 20% return on the $2 million outlay.
Now investors are competing with developers for sites, taking on their own development and construction risks. The site that used to cost $1 million will now go to an investor for $1.3 million, at which the developer can’t compete.
To the investor, who can complete the project themselves at no greater total expense, it makes no difference that the profit margin is small because they only seek to have a good, long-term capital investment. This trend is severely reducing the profit territory for developers and signals a big change in the market.
Increasingly, investors — individuals, syndicates or major institutions — are now taking full development and construction risk, pushing up the price of land, and reducing profit margins on development, but securing long-term investments for themselves usually at no greater price than had they bought from the traditional developer.
The perceived development risk has been reduced for investors, who can now hire project managers and other professionals to manage the development process.
It is also a reflection of these changed circumstances that increasingly quality assets, when completed, are not offered to the market but shifted on the balance sheet and held long-term, taking many traditional builder/developers into funds management and the listed trust sector.